Basic Treasury Citibank - download pdf or read online

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If we accept the hypothesis that, at some rate, we'll always be able to get money, then liquidity is just one aspect of profitability. The only reason we have to stay liquid is to avoid paying very high rates. Is that assumption true or not? The fact is, there comes a point where we no longer can get money. 0 V02/07/00 P04/06/00 LIQUIDITY MANAGEMENT Creditworthiness 3-3 One reason that liquidity is different from profitability has to do with creditworthiness. When the market notices that an institution is making increased use of high-rate sources, it assumes the institution is facing liquidity problems and that the risk involved in lending it money is now higher.

Figure 4-1: Negative gap Gaps are created to take advantage of expected future interest rates. Current long-term market interest rates reflect both current short-term market rates and the market's expectation about future short-term rates. If you expect that short-term interest rates will remain equal to or go below current market rates, you want to create a negative gap. That is, you want to borrow shorter maturities and lend longer maturities with the expectation that rates will be lower when it is time to renew the liability.

Let's assume that, at some rate, we can always get the money we need. If this is true, then liquidity is not the issue. The issue is how much we will have to pay for it, which impacts profitability. Can we say that the problem of keeping liquid is just a problem of being willing to pay the cost? If we need the money because the customer is in front of the window and wants to be paid, we will borrow from any agent in the market that has the money, even if s/he asks an enormous rate. If we accept the hypothesis that, at some rate, we'll always be able to get money, then liquidity is just one aspect of profitability.

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